The rising interest rates in the UK are finally showing their impact on the property market. While house prices in the UK are still on the rise, the rate by which the average price of property is rising has certainly slowed down. The rising rate of inflation coupled with the increase in the cost of living, plus the increase in the mortgage rate has certainly taken its toll on the UK property market. So, what do the rising interest rates mean for property owners? Is now a good time to start looking at potential new properties or should homeowners consider opting for an online house valuation?
We cannot talk about rising interest rates without talking about inflation. As the price of goods in an economy goes up, so does the rate of inflation. Essentially, an increase in the price of goods means an increase in the cost of living which is directly proportional to inflation. To calculate the cost of living, the Office of National Statistics will study over 700 daily commodities with over 18,000 price tags for those products to work out the cost of living. In 2022, the Office of National Statistics has found that the cost of living has gone up by 7 per cent. Based on that, the Bank of England has concluded that the rate of inflation will go up by a whopping 10 per cent by the end of the year. Keep in mind, passing an inflation rate of 10 per cent is the highest figure the UK has seen since 1982. Thus, in order to reduce the impact of inflation, the interest rates in the UK have risen by 1 per cent.
Rising rates and landlords
As the rate of inflation increases, so does the rate of interest. An increase in the rate of interest is directly proportional to higher mortgage payments for landlords. However, this means higher rents for tenants as landlords will look for ways to reduce the financial burden off themselves. Of course, landlords with fixed-rate mortgages will not face this issue. Some experts believe that the rate of interest will continue to rise in 2022 as well as in 2023 to curb the rising rate of inflation. As the cost of living continues to rise along with the rate of inflation, tenants might feel the pinch when it comes to paying their monthly rent, which in turn could slow down the rental market in the UK.
Rising rates and property owners
When an investor or a potential buyer purchases a property, he or she has to borrow money from the bank to fund this property investment. Usually, a buyer will get a loan which is equal to 75 per cent or 80 per cent of the value of the property and the remaining 25 or 20 per cent is paid as the deposit. For instance, if a property is worth £200,000, then the buyer will pay £50,000 as the deposit, which is 25 per cent of the value of the property, and take out a loan for the remaining 75 per cent which amounts to £150,000. If the buyer or investor has taken an interest-only mortgage, then he or she will only have to pay the interest monthly and will owe the principal value of £150,000 at the end of a certain period. Due to inflation, the true value of the mortgage changes; as the rate of inflation rises, the spending power of £150,000 changes drastically. After 20 years, the value of your property might increase to £400,000 or even £800,000, but the mortgage that needs to be repaid will still amount to just £150,000. Hence, purchasing properties during a period of inflation can actually be highly profitable, as long as a buyer can mitigate their risk by opting for a fixed-term mortgage due to the higher rates of interest.
Rising rates and mortgages
In September of 2021, property buyers were able to secure a five-year fixed-rate mortgage at interest rates as low as 1 per cent. Now, in 2022, these five-year fixed-rate mortgages are starting at 3 per cent. Some property experts believe that now is the time to lock in a good fixed-term mortgage deal before the Bank of England raises the interest rates again. Keeping with the rising rate of inflation and interest rates, mortgage approvals fell drastically in July and could continue to do so as the months go by.